Tuesday, 22 September 2015

The Italian Job: the CJEU strengthens criminal law protection of the EU’s finances

Steve Peers

The stereotype of fraud against
the EU budget is a sleazy EU official in Brussels receiving manila envelopes stuffed
full of bribe money, spending his ill-gotten gains to ensure that his lavish
lifestyle becomes ever more decadent. But according to the EU’s annual reports on such fraud, the typical offender is actually rather different:
it’s an individual or company who finds ways to get hands on EU money being
spent by the Member States, since
they are largely in charge of the day-to-day management of EU spending.
Furthermore, not all the breaches concern EU spending: some concern the
reduction of EU income, for instance
by avoiding the customs duties which apply to many goods coming from third
countries.

Agreeing and enforcing EU-wide
rules for such behaviour has long been a challenge. But in its recent judgment
in Taricco, the Court of
Justice has made a major effort to strengthen the law in this field.

Background

The CJEU ruled back in the 1980s
(in the Greek maize judgment)
that Member States could not simply ignore fraud against the EU budget, but had
to take effective measures to stop it. This rule was later added to the
Treaties, and now forms Article 325 TFEU, which reads in part as follows:

1. The
Union and the Member States shall counter fraud and any other illegal
activities affecting the financial interests of the Union through measures to
be taken in accordance with this Article, which shall act as a deterrent and be
such as to afford effective protection in the Member States, and in all the
Union’s institutions, bodies, offices and agencies.

2. Member
States shall take the same measures to counter fraud affecting the financial
interests of the Union as they take to counter fraud affecting their own
financial interests.

As regards criminal law, the
current legal rules on the topic date back to 1995, and were adopted in the
form of an international Convention (the ‘PFI Convention’) between the
Member States, which came into force in 2002. This treaty applies to all Member
States except for Croatia (although the Commission has just proposed its
application to that State), and the UK – which was initially a party but no
longer has legal obligations to apply the Convention since it opted out of many
pre-Lisbon criminal law measures as from 1 December 2014 (on that process, see
further here). Among other things, the PFI Convention obliges all Member
States to impose criminal sanctions for serious cases of fraud against the EU
budget.

The Commission proposed a Directive
to replace the Convention in 2012, and this is currently in the late stages of
negotiation between the Council and the European Parliament (for an update, see here; on the legal basis, see here). It’s evident that one of the main issues remaining in
the negotiations is whether the proposed Directive should apply to VAT fraud,
given that a small amount of VAT revenue goes to the EU budget. The Commission
and the European Parliament argue that it should, while the Council argues
against, presumably because the far larger part of the losses from VAT fraud
affects national budgets, not the EU budget. There are other issues in the
proposed legislation, such as a more precise possible penalty for fraud, and a
rule on ‘prescription’ periods (ie the time limit after which a prosecution can
no longer be brought or continued).

The proposed Directive is closely
connected to another piece of proposed EU legislation: the Regulation
establishing the European Public Prosecutor’s Office (EPPO). That’s because the
EPPO will have jurisdiction only over EU fraud, and so it’s necessary to have a
definition of that concept. (On the defence rights
aspects of the EPPO proposal, see discussion here); for an update on negotiations, see here). And the EPPO
Regulation is in turn linked to a third legislative proposal: the Regulation
refounding Eurojust, the EU’s agency for coordinating national prosecutions. That’s
because there will be close links between Eurojust and the EPPO, and so the
Eurojust Regulation can’t be finalized before the EPPO Regulation is agreed.
(The Council has agreed all of the Eurojust Regulation except for the bits
relating to EPPO links: see the agreed text here. This will still have
to be negotiated with the European Parliament, however).

Judgment

The recent CJEU judgment in Taricco concerns alleged VAT fraud
against a national budget, and in particular the question of prescription
periods. Italian rules on the breaks in prescription periods mean few cases
involving VAT fraud are ever seen through to completion, since time simply runs
out during the proceedings. A frustrated
Italian court therefore asked the CJEU whether these national rules infringed
the economic law of the EU: namely the rules on competition, state aids,
economic and monetary union and the main VAT Directive.

According to the CJEU, the national
law does not infringe EU competition law, because inadequate enforcement of
criminal law does not as such promote cartels. It does not infringe state aid
law, because the Italian government was not waiving tax obligations as such.
Furthermore, it does not infringe monetary union rules, since it was not
closely enough linked to the obligation to maintain sound public finances.

That left the VAT Directive. In
fact, that Directive sets out the scope of VAT (ie which goods and services
have to be taxed), but does not include any rules on criminal law issues. The
Court therefore assumed that the national court was asking it questions about
EU law more generally, and proceeded to interpret Article 325 TFEU and the PFI
Convention. According to the Court, building on the previous case law such as Fransson, there was not only an
obligation pursuant to the VAT Directive and Article 325 TFEU to take effective
measures in general against VAT fraud to defend the EU budget, there was also a
specific obligation to criminalise
such activity, where it was ‘essential to combat certain serious cases of VAT
evasion in an effective and dissuasive manner’. This was consistent with
obligations under the PFI Convention; the Court confirmed that the Convention
applied to VAT fraud, despite the absence of express provisions to this effect
under the Convention. Given the size of the alleged fraud in this case (several
million euros), it had to be considered serious.

Furthermore, the Court ruled that
the operation of the limitation periods in Italian law infringed Article 325
TFEU. A limitation period was not objectionable as such, but national law made
it effectively impossible to prosecute offences because the way in which it
calculated breaks in the prosecution. Also, the national law infringed the
principle of equality set out in Article 325, since other national laws on
similar types of economic crime did not contain the same problematic rules on
calculation of breaks.

The Court then ruled on the consequences
of this breach of EU law. In the Court’s view, the national court has to disapply
the relevant national law. This obligation was based on Article 325 TFEU, which
sets out precise and unconditional rules on effective and equal protection of
the EU’s financial interests. So the ‘precedence’ (ie, primacy or supremacy) of
EU law required national law to be disapplied.

Finally, the CJEU dismissed a
human rights objection to its ruling. While Article 49 of the EU Charter of
Fundamental Rights does ban the retroactive application of more stringent
criminal penalties than those in force when a crime was committed, the CJEU
ruled (following the case law of the European Court of Human Rights on the
equivalent Article 7 ECHR) that a limitation period was distinct from a
substantive criminal offence. The acts which the defendants were accused of committing
were undoubtedly criminal offences in national law at the time of their alleged
commission, so there was no retroactivity of criminal law in the sense
prohibited by the Charter.

Comments

“You were only supposed to blow
the bloody doors off!” This classic quote from The Italian Job aptly summarises the CJEU’s approach to the
relationship between national law and EU law in this judgment. Asked only to
rule on the interpretation of EU economic law, the Court decided instead to
strengthen the constitutional foundations of EU law in the criminal field.

Substantively, the Court’s
judgment is significant because it extends EU criminal law obligations to VAT
fraud. This is, in the Court’s view, a pre-existing obligation not only in the
PFI Convention, but also in the TFEU itself. To overturn it, Member States
would therefore have to amend the Treaty, not just the Convention (in the form
of the proposed Directive). Also, Member States’ obligations extend not only to
criminalisation of serious cases of VAT fraud, but to prescription (and so potentially
other procedural issues) as well. So if
Member States (in the Council) do insist on excluding VAT from the scope of the
EU fraud Directive, that would have limited impact. Indeed, the Council
Presidency has already asked Member States if there is any point
maintaining their opposition on this point after the Taricco judgment.

Presumably the Court’s rulings on
prescription and criminalisation apply to other forms of EU fraud too. This
means that including prescription rules in the Directive (as all of the EU
institutions are willing to do) simply confirms the status quo – although the final
Directive will likely be more precise on this issue than the CJEU’s ruling.
Furthermore, since the Taricco
judgment could help to unblock talks on the PFI Directive, this could have a
knock-on effect on the negotiations on the EPPO and Eurojust.

Moreover, the Court’s ruling
limits the effect of various opt-outs. Ireland and Denmark have opted out of
the proposed Directive, but will remain bound by the PFI Convention; the UK has
opted out of both. But they remain bound by the Court’s interpretation of the Convention
(for Ireland and Denmark) and the Treaty (for all three Member States). This
has limited practical impact, as long as national law remains compliant
(assuming that it is already compliant) with these measures as interpreted by
the Court. While the UK is no longer free to decriminalise fraud against the EU
budget, it was never likely to use that ‘freedom’ anyway, particularly as
regards VAT fraud, where the main loss would be to the British government’s
revenue, not the EU’s.

More fundamentally, the Taricco judgment strengthens the
constitutional foundations of criminal law obligations in the EU legal order.
While this may only be relevant for EU fraud cases, the Court has already
broadened that concept to include VAT fraud. In such cases, there is an obligation
for national courts to disapply incompatible national law as regards the procedural aspects of criminal proceedings.
Conversely, there is no obligation to disapply incompatible substantive national criminal law, since
this would lead to a breach of Article 49 of the Charter.

The ruling is based on the legal
effect of the Treaties – the Court
does not rule on the legal effect of the ‘third pillar’ Convention. It sets out
a test for primacy similar to the test for direct effect (the Court refers to
the precise and unconditional nature of the rules in Article 325 TFEU). It is
not clear how this rule fits into the EU’s overall constitutional architecture –
as a clarification of the general rules or as a special rule relating to protection
of the EU’s financial interests. But in any event, the Taricco judgment is a significant contribution toward strengthening
the EU’s role in this particular field.

2 comments:

By Giuliana Ziccardi Capaldo, Emeritus Professor of International Law, University of Salerno, gcziccar@unisa.it

The European Court of Justice’s New Approach to Tax Fraud as a Crime against Human Rights

I. In the following, I summarize some reflections developed in my article ( http://www.sidi-isil.org/wp-content/uploads/2017/10/Lotta-globale-ForumSIDI-1.pdf ) that touch on the core of the dispute between the Italian Constitutional Court and the European Court of Justice (ECJ) in the Taricco and Others case C-105/14 concerning the prosecution of VAT fraud.

Two very closely related issues are considered in this regard. One is that the ECJ’s view on the interpretation and application of the obligation to combat fraud, imposed on Member States by Art. 325 TFUE, opens the way to a new approach to tax fraud as a crime against human rights. The second, logically connected, is that the conflict between EU law (Art. 325 TFUE) and Italian Constitutional law (under which the principle of legality in criminal matters as laid down by Art. 25(2) Const. covers statutes of limitation periods) is a false problem for which I present a solution.

II. The proposal that tax fraud ought to be regarded as a violation of human rights must be inscribed within the broader framework of the new global law and the evolution of the protection of human rights (UNHRC, UNGPs (2011)). The ECJ could not remain indifferent to the global trend to widen the category of crimes that “should not go unpunished”, according to recent International Criminal Court (ICC) guidelines (Policy Paper, 15/9/2016, 1(7)).

The Luxembourg Court, in adherence to the great shift in thoughts aimed at protecting “the rule of law at the national and international levels”, as the GA (A/RES/67/2012) urges, intended to repress the crime of serious VAT fraud with effective measures, which, alongside the guilty, condemns States defaulting and disrespecting EU law and the founding principles of the world legal order. Amongst these measures, the imprescriptibility sanctioned by Article 29 of the Rome Statute is the logical-legal corollary to the prohibition of impunity. Consequently, in interpreting Article 325 TFEU, the ECJ in accordance with the principle of the precedence of EU law imposed on national courts the obligation to disapply domestic rules that do not ensure the punishment of those guilty of “serious” fraud, achieving a substantial imprescriptibility (§ 52).

This is why the ruling in question is without any doubt innovative and deemed an evolving global trend - aimed at strengthening the paradigm of the non-impunity-imprescriptibility of the new criminal jurisdiction centered on the ICC. Cooperation with internal courts is a tangible way to implement this objective and highlights the importance of the decision of the ECJ, which in so doing plays a significant role on a global level by supporting the ICC “in advancing the rule of law, thereby reducing impunity” (Preamble,Rome Statute).

III. The ECJ’s decision that national courts must disapply the rules of statutes of limitations if they prevent Member States from fulfilling their obligations under Article 325 TFEU (in the present case, the relevant Italian legislation) leads to perceiving serious fraud as a crime against the rights and interests of citizens, i.e., against fundamental social human rights guaranteed under Arts. 2 and 3 Const., and hence calls for resolving the conflict within the Italian Constitution by balancing the rights under these articles and the accused’s individual rights guaranteed by the legality principle (Art. 25 Const.), the former prevailing in light of the constitutional orientation that favors social and public interests.

IV. In conclusion, one can state that the primacy of EU law, as interpreted by the ECJ, does not conflict with national fundamental rights. Notwithstanding some critical aspects, the judgment under analysis is therefore a contribution to the realization of a global project that reveals a constructivist approach to global governance.